It’s a reliable source of help for many people across the country, but is the bank of Mum and Dad in a difficult spot? With reports that the government plan to reform inheritance tax (IHT), this could mean parents may face a tax bill when looking to gift money to their children in future. The changes could affect many middle-class families, especially those who were planning to help provide their children with funds for a deposit to buy a home. It’s estimated 60% of first-time buyer house purchases were funded by the bank of Mum and Dad in some parts of the country, in particular London, where house prices are high.So, could this mean providing your children with financial support is becoming less of an option? Or could this be just a small bump in the road?
The Impact of the Bank of Mum and Dad
The changes proposed would see a 10% tax on annual gifts of more than £30,000, replacing the current rules where just £3,000 a year can be gifted outside of the inheritance tax threshold.As long as the person doesn’t unfortunately die within 7 years of gifting this money, it is exempt from tax. The changes could see any parents looking to provide a deposit sum to their children possibly having to pay some of this to the government instead, meaning less towards that first-time buyer deposit. This is significant due to the bank of mum and dad now considered to be one of the biggest lenders in the UK. £6.3 billion is estimated to have been lent by parents across the country, placing the bank of mum and dad near to the country’s biggest mortgage lenders.
It’s not only purchasing a house that the bank of Mum and Dad have helped with of course, with many parents helping their children with smaller purchases as well. Many may turn to their parents first of all to borrow smaller sums of money if they have the option. For those that do not have the bank of Mum and Dad to rely on, it’s paramount that they make the right choices. Choosing a short term loanin the event of a financial emergency, for example, needs to be well considered to avoid the high costs associated if payments are missed or the loan term is agreed for longer than is needed.The bank of mum and dad can be a helpful resource for many as it can avoid those high interest charges, however there are disadvantages to relying on this form of borrowing.
The Bank of Mum and Dad Advantages and Disadvantages
The bank of mum and dad can help many young adults from making alternative financial decisions,such as taking out a high cost short term loanor payday loanthat they can’t easily afford to repay. This saves the cost of high interest being applied to what originally may have been a small amount. For all the positive aspects of having your parents to lean on financially, it’s not always the best option. Building financial independence is important as a young adult, something that can be difficult to achieve if your parents cover expenses regularly. The impact on a parent’s savings is also extremely high, with an average of just under £6,000 being ‘lent’ to children to buy a home.
For some parents, this can be a very high price to pay and can lead to financial consequences later in life, especially if a parent still has their own bills to pay. As well as lending towards house buying, many are paying towards their children’s first car or even helping to fund a gap year away. This also may have an impact on a parent’s retirement fund, especially with people living longer. According to the Office for National Statistics, many women aged 65 have a 7.4% chance of living to 100, possibly living past their current savings.
Borrowing low-risk money from a parent’s nest egg is convenient, but whilst the cost of raising a child continues to rise, the chances of a parent seeing that money again are slim. This could also lead to bad money habits being created within future generations.
Moving away from the Bank of Mum and Dad
For people that are over-reliant on the bank of Mum and Dad, the prospect of moving away from this source of financial help can be daunting. With potentially less money available to borrow from their parents, many under the age of 35 will look to budget more carefully and stimulate savings that otherwise may have stayed dormant. With a reported 53% of adults between the ages of 22-29 having no savings at all, the need for future planning among many young adults is overdue.Building up a credit history is very difficult to do if the bank of Mum and Dad is someone’s only form of borrowing. For someone who has never had or applied for a lending product, the need to start building this is important. Anyone that aspires to have a mortgage, for example, needs to have a financial footprint to show to a lender. A way to build this could be through applying for small amounts of short-term borrowing such as a loan, car finance or credit card, but only if you can afford to repay that amount quickly and have the affordability to do so. Alternative ways to build a financial footprint can be as simple as opening a bank account or taking out a mobile phone contract.
We understand the difficulty many young adults may face when the prospect of having to turn to high cost short term loans maybe their only option. At Wizzcash, we can provide you with helpful information when it comes to short term borrowing in a financial emergency to help you make better financial choices. You’ll find plenty of information throughout the website, such as when it may be a suitable time to apply for a payday loan. If you have any queries or want to find out more about our lending products, please do get in touch.